The burning issue

By Ed Crooks

When the International Energy Agency delivered its recent World Energy Outlook, one figure stood out: $500bn.

This is the amount that will need to be invested each year to keep inside the limits that scientists say are needed to head off the threat of catastrophic global warming – on top of the $1,200bn required simply to meet demand in a “business-as-usual” scenario. Such huge sums set the scale of the challenge the global energy system faces in delivering the supplies that consumers need without irreparably damaging the climate. If energy policy is to meet that challenge, it will need some creative and far-sighted thinking, and courageous political leadership.

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So what policies are needed to bring about the “revolution” in energy that the IEA and others say is needed? Three guiding principles stand out.

First, governments must be prepared to be interventionist. Private sector companies, from large multinationals to small innovative start-ups, are still best placed to deliver the energy that the world needs. But those companies almost universally agree that it is governments that will have to set the lead, and encourage the private sector to make the changes that are needed.

Regulations, taxation, subsidies and new market mechanisms such as emissions trading schemes will all be part of the toolkit, and all are likely to be deployed in a more interventionist way than in the past three decades.

“After 20 years of liberalised energy markets, we are learning that being first in line for cheap energy also means we are hardest hit when hydrocarbon prices rise,” says Greg Barker, climate change spokesman for the UK’s opposition Conservative party. As he admits, these sentiments would have once been heretical for the party of Margaret Thatcher, but times have changed.

The second principle is that policy must be coherent. Governments have an inevitable tendency to be pulled towards a range of competing objectives, and other aims can often undermine attempts to deliver cleaner and more secure energy. The textbook example is biofuels in Europe and the US, where energy policy became entangled in agricultural support policy, but there are many others. Germany’s insistence that offshore wind farms cannot be sited within 12km of the coast, ruling out some of the most attractive locations, is typical of the way that other environmental considerations can inhibit sound energy policy.

“Green stimulus” programmes are often particularly vulnerable to this confusion of objectives, as seen in the furious political row in the US over plans to use Chinese turbines for a wind farm that is receiving federal support.

GE, the US engineering group, has spoken eloquently about the way that the pressure to “buy American” militates against the attempt to deliver clean energy at the lowest cost. Energy policy should be aimed at meeting energy needs, rather than subordinated to other objectives such as employment.

Third, and perhaps most important, policy must be long term. The proportion of the world’s energy supplies derived from fossil fuels is 82 per cent. However, by 2050, according to today’s estimates of reserves, the world will have run out of conventional oil. That year is also the target set by developed countries for cutting 80 per cent of their carbon dioxide emissions; a huge reduction that will require all electricity generation to be carbon free.

Yet there are plenty of energy assets being planned, under construction, or already in use today, that will still be operating then. Today’s nuclear power stations are built with 60-year design lives, and experience suggests that if at all possible they will be pushed beyond those limits. The Nabucco pipeline to bring gas 3,300km from the Caspian region to the European Union, if built, could still be in use in the 2050s. Even a wind farm can last for 20 years, meaning that developments now in the planning stage will make a contribution to energy supply in the 2030s.

Politics, however, works on much shorter timescales, tied to a four- or five-year electoral cycle. Private sector investors also generally have shorter horizons, and that has become particularly true during the financial crisis. If the necessary investments are to be made, policy has to take a long-term view, based on political consensus. The lead times for large energy projects are often so great, owing to engineering complexity, approvals processes and so on, that it can be impossible to get a development under way within the span of a single administration. If power alternates between, say, one party favouring solar and one favouring nuclear power, there is unlikely to be adequate investment in either.

Energy is also a highly cyclical business, which all too easily encourages delusions that conditions are permanent when they are actually transitory. There is widespread talk today about the “gas glut” caused by the slump in demand, the surge in US “unconventional” gas from shales and other previously uneconomic sources, and a big increase in global production of liquefied natural gas as a series of huge projects come on stream. That prospect has led to warnings that gas infrastructure such as LNG terminals in the US will remain underused or not used at all.

Yet, as the industry saying puts it, “today’s glut is tomorrow’s shortage”, and vice versa. Facilities that are not needed in the 2010s could make essential contributions to energy supply in the 2020s or 2030s.

Forecasting is difficult, particularly when it is about the future, and policymakers can never be certain that they are making the right calls. But they must always have a sense of the pay-offs from policy that cannot be counted until long after they have left office.

Following those three principles for energy policy will not always be easy for democratic governments. Energy is likely to be more expensive, which is never popular. “Not in my back yard” opposition to wind farms or nuclear plants will have to be overcome. Some powerful vested interests will have to be defied. Unless the hard decisions are taken now, however, there will come a time when climate change and energy shortages cannot be ignored any longer.

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Reaching a peak: Debate over oil supplies rages on

The debate over “peak oil” – the point at which the world’s oil supplies go into irreversible decline – is a long-running argument that has not yet had much impact on energy policy.

Some geologists argue that peak oil is either very close or has passed, and the world will never again be able to produce the 83m barrels per day that flowed in 2008.

They are exasperated by what they see as the complacency of policymakers and analysts, particularly the International Energy Agency, which last month predicted that oil production could reach 103m barrels per day by 2030.

That sparked attacks from “peak oilers”, such as Kjell Aleklett, professor of physics at Sweden’s Uppsala University, who argued that production was more likely to be 75m barrels per day. Some claim that the IEA had been leant on to give an unrealistically upbeat outlook.

What many of its critics miss, however, is that the IEA itself is also deeply worried. As Fatih Birol, the IEA’s chief economist, explained to the Financial Times recently: “The uncertainties with respect to remaining oil resources and investment are so great that we cannot be confident that it will be possible to continue to increase world production.” Indeed, Birol believes the world must make a huge effort to curb its dependence on oil.

Not all peak oilers are so practical. Yet there is still scope to build a coalition between those who share Birol’s concerns about supplies, and those whose main worry is the threat of catastrophic climate change.

The best vision of that coalition’s programme comes from the UK Industry Taskforce on Peak Oil and Energy Security, a group backed by blue-chip companies including Virgin and Scottish and Southern Energy. It aims to move away from oil derivatives as the principal source of transport fuels towards biofuels and electricity.

While this remains a minority position, if evidence of difficulties in raising oil supplies mounts up, it could become the consensus on which energy policy worldwide will be based.